What is an SMSF and what is an SMSF Loan?

• A Self Managed Superannuation Fund (SMSF) allows you to manage your own retirement savings and investment choices, giving you more control over your financial future.
• An SMSF Loan is a specific type of loan that enables your SMSF to borrow money for investment purposes, commonly for purchasing property. The income from these investments goes back into the SMSF, growing your retirement savings.

Things to consider before setting up an SMSF

• Will it save you money? There are many fees involved in managing an SMSF. Consider how much you actually have as retirement savings and whether it is financially sound to set up an SMSF. You can start by comparing the accounting and audit fees costs of an SMSF against the 1-2% charged by a standard retail super fund.
• What benefits will you lose? You are likely to have many benefits and options included in an employer-provided super fund. However, to receive the same benefits under an SMSF, you would have to organise these yourself. The most common benefit is cheaper life insurance. However, you may find that many public super funds can transfer the insurance at the same rate into your own name.
• Can you invest your super funds effectively? When you are part of an employer-provided super fund, the money is managed and invested by professionals with specialised knowledge. If you cannot make good investment decisions, you will not be maximising the returns on your funds or managing your wealth effectively. Generally, SMSFs are best suited to those who have particular personal investment experience.
• Losing funds: If you were to lose any money, there would be no way to reclaim those funds. This is unlike the compensation available under other super funds.
• Are you well informed and do you have the time to manage the SMSF? You need to know about all the legislation, regulation and taxation requirements you are expected to meet. It is also important to have knowledge of the investment market. If you believe that you could not effectively manage your super fund, then you need to speak to experts and seek specialised advice. Accountants with specialist SMSF knowledge can assist you, but the responsibility ultimately falls upon the trustee.
• To ensure that you are complying with all of the regulations, speak to a tax agent who can offer you specialist taxation and financial advice.

Bare Trust mandatory for SMSF loan

• In a typical SMSF borrowing arrangement, the lender lends to the SMSF trustee who doesn’t actually hold legal ownership of the property. This is known as borrowing money.
• One of our lenders will actually lend to the trustee of the bare trust or holding trust, which means you can qualify for higher LVRs and lower interest rates. This is known as maintaining a borrowing.
• In order to meet SIS Act compliance requirements, there needs to first be an agreement between the SMSF trustee and the trustee of the bare trust.
• You should speak to your accountant when considering entering such an agreement.
• In addition to this requirement, the bare trust trustee must be a company or company director. When assessing the trustee’s capacity to borrow, the lender will use the director’s income or the trustee company’s latest profit and loss statement, including any rental income.

How much can I borrow?

• Lending policies for SMSFs vary among lenders, particularly in the way they assess your ability to repay the loan.
• Standard SMSF Investment Loans: Up to 90% of the property value for residential property.
• Commercial property: Up to 80% of the property value for non-specialised securities.
• Discounts: Most lenders add a margin to their normal residential loan rates for SMSFs; however, these margins vary significantly.
• Low doc (no income evidence): Up to 80% of the property value. However, SMSF low doc loans are very limited and have many restrictions.
• Bad credit: Up to 80% of a residential property or 75% of a commercial property with an SMSF bad credit loan.
• Standard investment loan rates may be available: Your SMSF structure must meet certain criteria.
• Unusual security or income types: There are specialist lenders that can help.

Deposit requirements

• For residential property purchase through SMSF, you generally need 20-25% of the property value as a deposit. You also need an extra 5% of the property value to cover the costs of completing the purchase. This little bit extra covers such expenses as stamp duty, mortgage transfer fees, the costs of a conveyancer and other legal expenses.
• For commercial property purchase through SMSF, you need at least a 30% deposit for an SMSF loan plus 5% for the costs of completion.
• Existing funds in your managed super account can be used as a deposit.

Personal Financials v. SMSF Financials

• Personal Financials: Banks will go through the same due diligence as they would with a typical home loan application.
  • In most cases, they will ask for your most recent payslip if you’re PAYG or your last two years tax returns if you’re self-employed. This will show your after-tax income. They will also look to see that you have stable employment, all of which gives them confidence in your capacity to make the SMSF loan repayments.
  • The great thing is that there are lenders that will also take into account the proposed rental income for the property that you’re buying. Most will use up to 80% of rental income, but some lenders will use 100%. Borrowing at the maximum Loan to Value Ratio (LVR) comes down to choosing the right lender.
• SMSF Financials: You’ll firstly need to provide a copy of the trust deed for the SMSF that explains the restrictions and rules around borrowing money and acquiring a beneficial interest in the asset you want to buy.
  • If the bank is satisfied, there is usually a requirement for the SMSF to have a minimum net worth of at least $200,000, including assets and dividends from existing investments. However, not all lenders require you to have this in order to borrow.
  • Will the bank use income from beneficiaries of the SMSF? Yes! Some will use this income to support your application if a personal guarantee is provided.
  • The liquidity requirement: After the total cost of purchasing the residential or commercial property is taken into account, you may have to pass what is known as a post-settlement liquidity requirement with some banks.
  • This means that there must be a certain amount of income and assets leftover in the trust after you complete the purchase. Generally, you need around 10-20% of the total assets remaining after the purchase. With some lenders, this jumps up to 40% if you’re near retirement age!

SMSF income types

• Employer superannuation contributions.
• Additional voluntary contributions.
• Rent income on the new investment property.
• SMSF dividend income (conditions apply).
• SMSF interest income (conditions apply).
• Some lenders will only accept 80% of all of the income in your fund, whereas others will use 100% of your income. All lenders assess only 80% of your rental income to allow for expenses such as management fees and repairs. This is why there can be big differences between the maximum loans sizes offered by different banks.

Restrictions

• Construction loans are not available. The SMSF is able to pay for renovations out of its own funds, but can’t use the borrowed additional funds for this purpose.
• Buying a property in your SMSF that you intend to live in as a home is not allowed (owner-occupied business premises are acceptable).
• Selling a residential property to your SMSF, that you or a related party owns is not allowed (commercial property is acceptable).

Property purchasing costs

• Minimum of 5% deposit
• Stamp duty
• Property title transfer fee
• Registration fees
• Conveyancing fees
• Inspections including building/strata and pest
• Home loan set up fees
• Lenders Mortgage Insurance (LMI)

Property selling costs

• Agent Fees
• Marketing Costs
• Conveyancing Fees
• Capital Gains Tax (CGT)
• Presale Repairs and Renovations
• Styling/ Home Staging
• Auctioneer’s Fees
• Lender Fees
• Moving Costs